Junk Bonds Will Crash
Exclusive: Porter Stansberry says ‘it will be the largest destruction of wealth in history’
WND
We didn’t mean to call the top. But it sure looks like we did.
On May 10, I issued this warning to my readers: “The U.S. bond market – particularly junk bonds – is going to crash. When this crash occurs, it will be the largest destruction of wealth in history.”
As I explained then, I believe we’ll see a real panic in the corporate bond market at some point in the next year. I expect the average price of non-investment-grade debt (aka junk bonds) to fall 50 percent. Investment-grade bonds will fall substantially, too. (I’d estimate somewhere around 25 percent.)
This is going to wipe out a huge amount of capital, and believe me, it’s 100 percent guaranteed to happen. It’s already starting.
On May 7, the yield on the Barclays U.S. Corporate High Yield Index fell to a record low of 4.97 percent. It was the first day in the history of the U.S. junk bond market (where less creditworthy companies borrow) that the index yield fell to less than 5 percent.
The next day, yields fell again to 4.96 percent.
Watching the action that week, we simply couldn’t believe our eyes. General Motors issued new debt paying a yield of only 3.75 percent. General Motors is sitting on roughly $100 billion in pension obligations. It went bankrupt less than five years ago. And it operates in a sector that’s still suffering from massive overcapacity. To say GM’s five-year note isn’t investment-grade could be the punch line of a joke.
At yet, there it was. You should imagine us sitting at our desk, rubbing our eyes in disbelief.
It is impossible to justify the high price of junk bonds (and their correspondingly low yields).
You must remember that the default rate on these bonds will soar, sooner or later.
Reposted with permission.
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